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Compliance with section 45 of the Companies Act (no.71 of 2008) is proving a challenging matter to companies and clients alike. Section 45 addresses “loans or other financial assistance to directors”. This includes inter-company loans and loans between related and inter-related parties.

Looking closely at the term financial assistance, the act defines it as including the lending of money, guaranteeing a loan or other obligation and securing any debt or obligation.
This section of the act looks at financial assistance provided to a director or an officer of the company, to a related company, an inter-related company or to a related or inter-related corporation or to the director or member of any of these. Section 45 furthermore looks at financial assistance to any person related to one of the companies, corporations, directors or members as described.

Kevin Pietersen, a director at Pietersen Incorporated, says that section 45 has expanded the protection provided to shareholders in respect of financial assistance granted by a company, but has also introduced a new challenge for companies within the same group, as the directors of any holding company must now ensure that financial assistance provided to a related company, which includes a company’s subsidiaries within the same group, has complied with the provisions of the section.

Despite anything in the memorandum of incorporation (MOI) of a company to the contrary, the board of a company may not authorise any financial assistance unless it is pursuant to an employee share scheme that satisfies the requirements of section 97, or the shareholders of the company have passed a special resolution adopted within a period of two years that approved such assistance either for a specific recipient or generally for a category of potential recipients, and the specific recipient(s) falls within this category.

Pietersen adds that in every single transaction pertaining to the provision of financial assistance as described previously, the board of the company has to be satisfied of two things in specific. “The first is that the board has to be sure that immediately after providing the financial assistance, the company will still be able to satisfy the solvency and liquidity test. The board also has to be satisfied that the terms under which the financial assistance is proposed to be given, will be fair and reasonable to the company itself.”

Pietersen says in addition the board must also ensure that any other conditions regarding the provision of financial assistance that may be contained in the company’s MOI, has been satisfied.

Section 45 continues and determines that after the adoption of any resolution of the board to provide financial assistance, the board must give written notice thereof to all the company’s shareholders, unless all the shareholders are directors of the company.

“The board must also, in terms of the act, give the same notice to every trade union representing the company’s employees,” says Pietersen.

This written notice must be given within ten business days after the board adopts the resolution, if the total value of the financial assistance, together with any previous financial assistance exceeds 0,1% of the company's net worth at the time of the resolution; or in any other case, within 30 business days after the company’s financial year-end.

Pietersen says companies should note that any resolution taken by the board or any agreement with respect to the provision of financial assistance, is void to the extent if it does not comply with the stipulations as described above.

“If a resolution is void or an agreement is void in terms of section 45 the result is rather nasty. The act warns that a director of a company is liable for any loss, damages or costs suffered by the company, if that director was present at the meeting when the board approved the resolution or agreement, or participated in the making of such a decision at any other occasion,” says Pietersen.

He says the second part to this is that the aforementioned director must vote against the resolution or agreement for the provision of financial assistance which is inconsistent with the act, if the director is present, in order to escape liability.

For more information, please contact Edward Mahlasela on 083 427 0834 or edward@redstarcommunication.co.za